What City thinks of BP shares after profit slip-up

Pressure on the 6.8%-yielding shares of BP (LSE:BP.) failed to ease today after results covering the period before the slide in oil prices came in short of the City’s already cautious forecasts.

The stock is down by a third in the past year, having been one of the worst hit in the FTSE 100 tariffs turbulence due to worries over the outlook for shareholder distributions.

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Those jitters were not helped today by a miss on first-quarter net income, a spike in net debt to $27 billion (£20 billion) and the announcement of a $750 million buyback at the bottom end of guidance.

The latest disappointment after a run of misses on the earnings front follows the recent rotation to Shell (LSE:SHEL), which has outperformed its peers in terms of total shareholder returns since 2023. Its shares are down by 4% this year compared with more than 13% for BP.

Despite BP’s recent operational challenges, the company's high yield and cheapest price for three years continues to attract strong interest among interactive investor customers.

Their enthusiasm is shared by fund managers after the latest Morningstar data showed BP as the fourth most popular dividend-paying stock among UK equity income funds.

An unchanged quarterly dividend of eight US cents a share worth $1.2 billion is due to be paid on 27 June, with the sterling amount due set to be announced on 10 June.

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The company has pledged to grow the dividend by 4% a year, which together with buybacks will result in total shareholder distributions of 30-40% of operating cash flow.

A $1.75 billion buyback completed on Friday and is to be followed by one of $750 million after BP indicated a figure between $750 million-$1 billion at February’s capital markets day.

Morgan Stanley notes that free cash flow of $1.6 billion once lease liability and hybrid coupon payments are taken into account came in below the planned first quarter outlay of $2 billion on shareholder distributions.

It makes the point that this happened in a period when the average Brent crude price was still at an average $76 a barrel. The benchmark was trading at less than $65 earlier today.

Net debt in today’s first-quarter results also increased significantly, although this was largely driven by a working capital build-up and should unwind in the coming quarters.

The bank adds that net income of $1.38 billion was about 10% below the company-compiled consensus of $1.53 billion, having been subject to heavy downgrades in recent weeks. It pointed out that consensus at the start of the quarter stood at $2.3 billion.

The reported figure still represented an improvement on the $1.2 billion of the previous quarter after BP achieved “good progress” on meeting its structural cost reduction ambitions.

At an operating level, UBS said earnings of $4.5 billion were 1% below consensus with a large 36% miss in gas and low-carbon energy largely offset by beats in the rest of the business.

BP said it made significant progress implementing February’s strategy reset, under which it will grow upstream operations, take a more focused approach to the downstream and invest with discipline in the energy transition.

So far this year the company has started up three major projects, made six exploration discoveries and progressed its divestment programme.

It expects proceeds of $3-4 billion this year, underpinning the company's confidence in meeting a net debt target of $14-18 billion by the end of 2027.

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BP added that it recorded a strong operational performance in the first quarter, with over 95% upstream plant reliability supporting the best operating efficiency on record.

Chief executive Murray Auchincloss said: “We continue to monitor market volatility and changes and remain focused on moving at pace.

“I’m confident that our plans to strengthen the balance sheet, reduce costs, and improve cash flow and returns will grow long-term shareholder value and strengthen the resilience of BP.”

Shares today fell to below 350p, which compares with Morgan Stanley’s price target of 377p and UBS at 400p.